In: Accounting
List and discuss the five commonly accepted factors influencing a country’s financial reporting practices.
The five commonly accepted factors influencing a country's finanacial reporting practices are given below:
1.Legal System- Two major types legal systems found around the world is common law and codified Roman law.In countries following the common law such as U.K specific accounting rules are established by the professional or by an independent and non govermental body representing a variety of constituencies.Country tends to determine whether the primary source of accounting rules is the government or a non governmental organizations.In common law countries where there is likely to be a non legislative organization developing accounting standards,much more detailed rules are developed.In code law country the accounting tends to be more general and does not provide much details regarding specific accounting practices and may provide no guidance at all in certain areas.e.g Germany.
2.Taxation- In some countries published financial statements forms the basis of taxation,where as in some countries the financial statements are adjusted for tax purposes.In most cases for an expense to be deductible for tax purpose it must have been includedein the financial statement income.Some countries attempt to minimize income for tax purposes whereas some countries do not practice this.The difference between tax and accounting income gives rise to the necessity to account for deferred income taxes in most of the countries whereas in some code laws countries. e.g Germany deferred income taxes are of much less issue or they do not exist at all. Similar case is with the
3.Providers of Financing - The major providers of financing for business enterprises are banks,government and shareholders.In those countries in which company financing is dominated by banks or government or the state,there will be less pressure for public accountability and information disclosure.As companies become more dependent on financing from the general public through offering of shares or stock the demand for more information made available outside the company becomes greater.The information needs of the financial statement users can be satisfied through disclosures in the accounting reports.There can be difference in the financial statement orientation, with stockholders interested in profit (emphasis on income statement) and banks more interested in solvency and liquidity (emphasis on the balance sheet)
4.Inflation - Adjusting income for inflation is important in certain countries in which accounting statements serve as the basis for taxation ,otherwise companies will be paying taxes on fictitious profits.Also some countries experiencing high rates of inflation tend to adopt accounting rules that requires the inflation adjustment of historical cost amounts.
5.Political and Economic Ties - Accounting can either be relatively easily borrowed form or imposed on another country.Through political and economic links,accounting rules have been conveyed from one country to another.